My most recent books are the Leader's Guide to Radical Management (2010), The Leader's Guide to Storytelling (2nd ed, 2011) and The Secret Language of Leadership (2007). I consult with organizations around the world on leadership, innovation, management and business narrative. At the World Bank, I held many management positions, including director of knowledge management (1996-2000). I am currently a director of the Scrum Alliance, an Amazon Affiliate and a fellow of the Lean Software Society. You can follow me on Twitter at @stevedenning. My website is at www.stevedenning.com.

“There is an arresting moment in Walter Isaacson’s biography of Steve Jobs in which Jobs speaks at length about his philosophy of business. He’s at the end of his life and is summing things up. His mission, he says, was plain: to ‘build an enduring company where people were motivated to make great products.’ Then he turned to the rise and fall of various businesses. He has a theory about ‘why decline happens’ at great companies: ‘The company does a great job, innovates and becomes a monopoly or close to it in some field, and then the quality of the product becomes less important. The company starts valuing the great salesman, because they’re the ones who can move the needle on revenues.’ So salesmen are put in charge, and product engineers and designers feel demoted: Their efforts are no longer at the white-hot center of the company’s daily life. They ‘turn off.’ IBMIBM [IBM] and XeroxXerox [XRX], Jobs said, faltered in precisely this way. The salesmen who led the companies were smart and eloquent, but ‘they didn’t know anything about the product.’ In the end this can doom a great company, because what consumers want is good products.”

Don’t forget the money men

This isn’t quite the whole story. It’s not just the salesmen. It’s also the accountants and the money men who search the firm high and low to find new and ingenious ways to cut costs or even eliminate paying taxes. The activities of these people further dispirit the creators, the product engineers and designers, and also crimp the firm’s ability to add value to its customers. But because the accountants appear to be adding to the firm’s short-term profitability, as a class they are also celebrated and well-rewarded, even as their activities systematically kill the firm’s future.

In this mode, the firm is basically playing defense. Because it’s easier to milk the cash cow than to add new value, the firm not only stops playing offense: it even forgets how to play offense. The firm starts to die.

If the firm is in a quasi-monopoly position, this mode of running the company can sometimes keep on making money for extended periods of time. But basically, the firm is dying, as it continues to dispirit those doing the work and to frustrate its customers.

There is another way

What’s interesting is that Steve Jobs lived long enough to show us at AppleApple [AAPL], in the period 1997-2011: what would happen if the firm opted to keep playing offense and focus totally on adding value for customers? The result? The firm makes tons and tons of money. In fact, much more money than the companies that are milking their cash cows and focused on making money. Other companies like Amazon [AMZN], Salesforce [CRM] and Intuit [INTU] have demonstrated the same phenomenon and shown us that it’s something that any firm can learn. It’s not rocket science. It’s called radical management.

Fifty years ago, “milking the cash cow” could go on for many decades. What’s different today is that globalization and the shift in power in the marketplace from buyer to seller is dramatically shortening the life expectancy of firms that are merely milking their cash cows. Half a century ago, the life expectancy of a firm in the Fortune 500 was around 75 years. Now it’s less than 15 years and declining even further.

Why do managers keep on this path that is systematically killing their firm? For one reason, it’s more difficult to add value than to cut costs. For another, the executives have found ways to reward themselves lavishly. As Upton Sinclair has noted, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

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So now we’re blaming salespeople and accountants? In most companies, the Sales organization has a much better understanding of customer needs than the folks in product development. That’s because people don’t buy lousy products, and the greatest Sales team in the world can’t sell stuff that people won’t buy. Product developers,on the hand,like to work in some back office and won’t get out with customers unless you kick them. They’re no more “creative” than anyone else.

You raise a valid point about the salespeople being in the best position to gauge what the customers want. But there are two major points I would like to raise with respect to this line of thought.

1. A “lay” customer in general (it is a generalisation sadly) may not be aware of what can be feasibly achieved. Feasibility can be both technological, or technological within a given budget. The sales team can channel information in both ways, from the customer to the R&D and vice versa. The layman might want jet packs (funny as it sounds) but may not understand the technological, economic and safety limitations faced in their mass manufacture. Science progresses at the certain rate. But for a valid product to reach the market, a lot of study on what may appear as rather pointless (to the un-initiated) subjects might have to be performed. But that doesn’t mean the funds should be cut off simply because the people calling the shots are not able to see/comprehend the scientific value.

2. More importantly, Steve’s article is about the rampant culture where cost cutting is acknowledged as the only way of improving profits. The one industry which has more or less completely sidestepped the 2008 crash has been computer tech. Silicon valley is still the place where majority of the people calling the shots are people who are computer people rather than people brought in from the outside. Google is an ideal example, where the founders were and still are very reluctant to give off the reins concerning development funding completely to the CEO/CFO’s and still more or less call the shots.

Using Steve’s argument Detroit is an ideal example of what happens when increasing profits “purely” by efficiency can lead to. Unsatisfied workers who eventually leave and eventual lose of markets due to lack of new products.

Steve is not blaming the managers/accountants/salepeople per se, but rather the culture of taking over from a company and running based purely on numbers. The shareholders may become happy in the short run, eventually the numbers will fail to keep because there is no-one/no-funding to make the new products in a changing market.

Apparently, Steve Jobs and I have a similar observation. I call it the “MBA Syndrome.” The professional managers focus on risk mitigation not wowing the customer with product offerings. I see this as part of the problem in Big Pharma.

I think US corporations lose their competitive edge when they do not promote from within. If they bring in “expert managers” with a wall full of degrees, they usually know very little about the product that is being produced. They start out by buying out other companies who make a similar or related product. This gives the company the appearance of growth and profitability. As time goes on it becomes so big and diverse that, eventually, no one has a handle on everything that is going on. Then they start the slash and burn technique to try to make the company more efficient. This causes so much stress among the employees that no one is being innovative. Steve Jobs didn’t have a college degree, he just understood his product and had a eye for what would sell.

Nice insights by Steve and Peggy. However, I think it goes deeper. In all companies, especially publicly-traded ones, there is a constant tension between efficiency and innovation. Most of our business managers and investors’ education focuses on efficiency, and that is typically what is rewarded by Wall Street. Top managers and their accountants understand efficiency better than they understand innovation. Besides, innovation is messy and risky and hard to measure, and therefore hard to justify. It is a rare leader who can re-balance the tension between efficiency and innovation in order to allow a company to build great products over the long-term. In the Apple example, Steve Jobs could do it, while John Sculley could not.

I would however add the caveat that if one is looking at the problem as “balancing innovation and efficiency”, requiring a unique “master juggler” like Steve Jobs to succeed, one is misconstruing the situation. One is looking at innovation and efficiency as being opposed to each other. The magic of Apple and firms practicing radical management is that innovation and efficiency don’t have to be opposed at all.

They *seem* to be opposed when you try to innovate in a hierarchical bureaucracy focused on making money, because then the cost cutters are continually cutting out the very elements that create innovation. Milking the cash cow will usually seem like the easier and cheaper option than innovation: so the conclusion is: let’s forget about innovation for now!

If on the other hand you have the whole organization totally focused on creating innovation and delighting customers as its bottom line i.e. offering additional value for customers and getting it them sooner, then guess what? Whole chunks of stuff that chew up enormous amounts of time and money in a hierarchical bureaucracy (the reporting up and down the line, the meetings, the game playing, the lack of transparency and so on) get eliminated because they are not contributing to adding value to any customer. As a result, costs come down of their own accord. In radical management, innovation and efficiency reinforce each other. That’s why radical management both makes a lot of money and saves a lot of money, as well as delighting customers.

In this world, efficiency and innovation are mutually reinforcing, not opposed.

Steve, no disagreement from me. Great thoughts and an excellent theory. I look forward to the day that more business leaders put that theory to work. This is still reality in most companies. They are hierarchical and tend to worry more about protecting their legacy product profits than innovating.

Apple is not normal. it will be interesting to see how they how they proceed post-Jobs.

Dear lwdenton, On your comment “I look forward to the day that more business leaders put that theory to work”. I’d put it that we need a new breed of leaders who have a sense of duty to their customers, employees, shareholders as opposed to themselves. There is a huge cultural problem of selfserved-ness among c-level executive circles. I’ve seen many cases where all they care about is bullying their own selves into very powerful and secure positions in an organization, and paying about an order of magnitude less attention to anything else – be it creativity or efficiency or bottom line or whatever you might want to call it – in the companies they run.